SUN HUNG KAI INVESTMENT SERVICES LTD v. QUALITY PRINCE LTD AND OTHERS

HCA1995/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1995 OF 2008

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J U D G M E N T

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1.  This is an action by the plaintiff to recover a debt (with interest) from one of the guarantors of the debt (“Debt”), the 4^th defendant (“Chan”). This trial only concerns Chan. The key issue in this trial is whether the guarantee which Chan had executed in favour of the plaintiff came into existence under the undue influence of her late husband, Lam Sai Wing (“Lam”).

Background

2.  The background facts are quite simple, much of which are not in dispute and they can be simply stated (and I find them to be proved save where indicated otherwise) as follows.  The plaintiff is a licensed corporation under the Securities and Futures Ordinance, Cap 571.  Its core business includes share-broking, underwriting initial public offer and margin financing.

3.  Lam was the founder and Chairman of a Hong Kong listed company called 3D-GOLD Jewellery Holdings Ltd (formerly known as Hang Fung Gold Technology Ltd) (“HFG”).  Lam held a substantial portion of the shares in HFG (over 178 million shares) either directly or through corporate vehicles.  HFG was de-listed from the Main Board of The Stock Exchange of Hong Kong Ltd on 9 July 2012.

4.  The 1^st and 2^nd defendants (“D1” and “D2”) were BVI companies.  They were wholly or substantially owned by Lam.  In the case of the D1, its shares were held by S W Lam, Inc (“SWL”), a company listed in the USA.  82% of the shares in SWL were owned by Lam.  Lam and Chan were the directors of D1.  Lam was the sole shareholder and director of D2.  Both D1 and D2 had a margin securities trading account with the plaintiff and they were wound-up by the BVI court in November 2009. 

5.  It is contended by the plaintiff that Chan is the beneficial owner of 300,000 shares in SWL, which are equivalent to 2.3% of the total shareholding.  Further, she was the Vice-President, CFO and a director of that company.  These contentions are denied by Chan.  I shall return to these matters when I deal with Chan’s evidence. 

6.  D1’s account with the plaintiff (“Account”) had a facility limit of HK$50 million.  In exchange for such facility, D1 had to deposit securities with the plaintiff and to maintain the value of such securities at no less than 500% of the amount of its liabilities to the plaintiff.  100 million shares of HFG were deposited with the plaintiff by D1 as such securities.

7.  For its account with the plaintiff (the contractual provisions of which were similar if not identical with those applicable to the Account), D2 had deposited 50 million shares of HFG with the plaintiff as securities.  I shall refer to the 150 million shares of HFG held by the plaintiff as “Securities”.

8.  For the purpose of the Account, Lam, Chan, D2 and the 5^th defendant (who was the CEO of HFG (“Ng”)) had each executed a Deed of Guarantee in favour of the plaintiff to stand as surety for D1’s liabilities arising out of the Account.  All the relevant documents in respect of the Account, including the guarantees, were in English.

9.  During the first half of September 2008, the level of securities for the Account fell below the contractual requirement due to the significant drop in the share price of HFG.  It may be remembered that in mid-September 2008 there was a worldwide financial tsunami.  Demands were made by the plaintiff to D1 for the reduction of outstanding margin facilities or an increase of securities.  By a letter dated 23 September 2008, D1 was notified by the plaintiff that if the outstanding sum of HK$50m was not repaid in full by 26 September 2008, an interest rate of 2.5% per month (equivalent to 30% per annum) would be applied from 29 September 2008. 

10.  In the small hours of the 26 September 2008, Lam suddenly died.  It was a Friday.  On Monday, 29 September 2008, the trading of HFG shares was suspended.  On the next day, when trading was resumed the share price went into a dive and as a result trading was again suspended in the afternoon by which time the share price had dropped 60% to HK$0.65 per share from the previous closing price of HK$1.63.  The trading for that stock was never resumed thereafter.

11.  A demand letter was sent by the plaintiff’s solicitors on 30 September 2008 to D1 for immediately repayment of all outstanding liabilities.  Similar letters were also sent on that day to each of the guarantors (in respect of Lam, the letter was sent to his personal representative).

12.  The demands were not met and on 6 October 2008, there were more bad news about HFG.  On that day, there were newspaper reports of a complaint to the police that someone at the senior management level of that company had misappropriated HK$200m from it. 

13.  On the 6 October 2008, the plaintiff exercised its power of sale over the Securities and sent out over 300 letters to Licensed Corporations inviting bids for the same by way of private placement.  There was only 1 response and those shares were sold to that sole bidder on 10 October 2008 at HK$0.1 per share. 

14.  After taking into account the net sale proceeds, the total amount owing under the Account was HK$36,030,376.64 (“Sum”), inclusive of interest up to 13 October 2008.  Helpfully, this court has been provided by Mr Liu, who appeared for the plaintiff, with a calculation sheet marked “B” setting out the details of how the Sum was arrived at.

The issues

15.  This trial is essentially about Chan’s claim of undue influence.  There are, however, some ancillary issues which have either been raised in her pleading or by this court in light of the fact that she was unrepresented at the trial (a Notice to Act in Person was filed by Chan on 13 September 2013).  The ancillary issues are:

(1)     Whether the Consolidated Daily Statement of the plaintiff dated 14 October 2008 (“Statement”) in respect of the Account with details concerning the Sum, which had been confirmed as accurate by one of its directors, Leung King Yuen (“Leung”) (who has since retired), can be relied upon as conclusive evidence in this action;

(2)     Whether the interest claimed by the plaintiff is unconscionable;

(3)     Whether the plaintiff had failed to mitigate its loss in the sale of the Securities;

(4)     Whether the plaintiff is entitled to costs on indemnity basis premised upon the provisions of the Deed of Guarantee and Indemnity executed by Chan (“Deed”).

The law on undue influence

16.  The applicable legal principles are reasonably clear by now.  I have been referred by Mr Liu to Chitty on Contracts, 31^st ed, vol 1, §§7-061, 062 and 065 wherein a good summary of those principles can be found.  I also remind myself of the judgment in Bank of China (Hong Kong) Ltd v Well Lok Printing Ltd & Ors, unrep, HCMP 3925/2002, 5 September 2006, paras 7, 33-35, 40-42 and 49.

17.  This is a case of “relationship based undue influence” as referred to in Well Lok Printing. The task for the court is one of fact finding, and the burden of proof is on Chan.  To make out her case, Chan is required to prove as prerequisites (a) that she reposed trust and confidence in Lam and (b) the transaction represented by the Deed is one which calls for an explanation (in the sense that it cannot be readily explicable by the relationship of husband and wife).  Once those prerequisites are established, they can give rise to a prima facie inference of undue influence. 

18.  If undue influence is established and given that this is a pure surety case (see para 49 below), the plaintiff was put on inquiry in respect of the propriety of the transaction.

Plaintiff’s evidence 

19.  Two witnesses were called by the plaintiff.  In addition to Leung, Josephine Ho (“Ho”), who was a solicitor in the employ of the plaintiff’s solicitors (“PCW”), was called to give evidence on her dealings in respect of 4 loan transactions which involved 6 sets of loan and related documents (there were 2 extensions in respect of 1 of the loans and hence there were 6 sets of documents).  Those transactions took place between March 2001 and May 2003.  The borrower was D1 in each case and the lender was the plaintiff or its affiliates.  Three of the loans were to be used for “general working capital” and the 4^th loan was taken out to repay an earlier loan.  Ho was responsible for preparing the documents, including the guarantees.  Chan was one of the guarantors in respect of each of the loans and the extensions.  Ho’s evidence is that she was also responsible for meeting Chan to explain the documents to her in Chinese.  On each occasion, she had advised Chan of her right to seek independent legal advice. 

20.  There was another similar loan transaction which took place in July 2000 but it was handled by a different solicitor.  Lam was the borrower in respect of that loan, which was used to repay an existing debt of D1.  It was also guaranteed by Chan.  Ho also confirmed that the Deed was not prepared by PCW or executed in her presence. 

21.  Ho’s evidence was not really challenged and I accept her evidence.

22.  Leung’s evidence was mainly to prove the plaintiff’s case.  In addition, various positions or offices held by Chan have been set out in Leung’s evidence.  The only real challenge to his evidence concerns the disposal of the Securities, which I shall deal with below under mitigation of damage.

Chan’s evidence

23.  Chan was born in the Mainland where she grew up.  In 1978, when she was about 15 years old, she came to settle in Hong Kong with her family.  She started working soon after her arrival for two reasons, namely, economic need and her inability to understand Cantonese.  She worked as a sewing worker in the garment industry and as a sewing and dispatch worker in the toy industry. 

24.  After her had arrival in Hong Kong for about 1 year, Chan began to attend evening English classes.  Understandably, Chan was quite vague in her recollection over these classes.  In any case, she said that those classes lasted 1 or 2 hours and they were held in 3 or 4 evenings every week.  She attended those classes for 2 to 3 years and it was during such attendance that she met Lam. 

25.  Chan is adamant about having very limited ability in English.  Despite her attendance at evening classes many years ago, I have to bear in mind that there is no evidence that Chan has ever been a regular user of that language.  In the course of her cross-examination, Chan was asked by the court if she knew the English address of her previous home in Bowen Road.  Her answer was spontaneous and it reflects a very limited ability in English.  There is no reason to doubt the truthfulness of that answer.  There is no evidence to contradict that of Chan’s regarding her understanding of the English language, and I accept the same as true.

26.  Chan’s evidence is that she came from a very traditional Chiu Chow family where girls were discriminated.  This is well-illustrated by her evidence that she had to look after her younger brother and only started school when she was 9 years old together with her younger brother.  She was half-way through the 2^nd year of secondary school when her education came to an end in the Mainland. 

27.  Chan was married in 1984 when she was 21 years old.  She started working for Lam’s jewellery business the year before with the responsibility over receipt and despatch, which is apparently an important position given the value of the trading stock.  Lam started his jewellery business with a workshop in 1979 or 1980.  When Chan joined him in 1983, there were 5 employees including her.  In 1984, the business took a downturn and only the husband and wife were left in the company.  The business recovered in 1985 after Chan gave birth to a son.

28.  Lam was described by Chan as a hardworking, able and ambitious man.  This is fully borne out by the fact that Lam was able to nurture his business from a 2-man band to a listed company (listing took place in 1999).  Chan’s evidence is that Lam was also a very dominating Chiu Chow husband with a violent temper.  Lam made all the decisions.  He did not consult Chan even on the purchase of the family home.  He would not tolerate any dissent from his wife and had resorted to using violence on her. 

29.  As a traditional and submissive wife, Chan was asked from time to time by her late husband to sign various documents.  She dared not ask about the contents of those documents to avoid any conflict with Lam.  I infer form such evidence that Chan did not know the nature of the documents which she was asked to sign.  There is also a good possibility that at least some of those documents were in English. 

30.  In respect of the Deed, she believes that she was asked by Lam on the day before signing that document (21 March 2005) to go to the company to sign some documents for opening an account, and she did so accordingly.  Ng gave her the Deed to sign at the company.  There was no explanation given to her as to what she was signing.  Chan was adamant that had it not been for her late husband’s influence over her, she would not have signed the Deed.  She maintains that Lam had abused her love, trust and reliance on him.

31.  When Chan gave evidence about the pressure on her since the death of her husband, her humble background and her reluctance to reveal the details of her relationship with her husband, she became emotional and broke into tears.  I have no reason to believe that the outburst of emotion was anything but genuine.  Insofar as these aspects of her evidence are concern, I believe that Chan was telling the truth.

32.  As regards D1 and the Account, Chan’s evidence is that she had no interest in D1.  It was owned by Lam through SWL.  She denied having any interest in SWL or holding any position in the same.  Chan had nothing to do with the Account.  She had no right to operate it and derived no benefit from it.  I note that apart from the fact that Chan was one of the directors of D1, there is no evidence of any connection between Chan and D1 or the Account. 

33.  Chan was, expectedly, cross-examined at some length.  There are 3 areas which I should deal with.  Firstly, Chan’s original pleaded case was that the Deed was signed at PCW.  It was alleged that PCW failed to explain the contents of the document to her, nor advised her of her entitlement to seek independent legal advice before she signed the Deed.  It was also alleged that Chan was “therefore induced to sign the [Deed] whilst acting under the influence of [PCW]”.  I must say that the basis of that averment is quite unclear.  However, that pleading was subsequently amended to advance a case of undue influence by Lam.

34.  Chan explained that when she was sued by the plaintiff she was at a lost as to what she had signed.  She discussed the matter with Ng.  Neither of them recalled what took place.  Chan only remembered attending PCW many times to execute documents which were all in English.  They could not recall the signing of an important document at the office.  The old pleading was produced by Chan’s lawyers based on the discussion between her and Ng. However, the pleading was amended when it was shown by the plaintiff that the Deed was not signed at PCW but at the office. 

35.  I find this explanation by Chan quite plausible. This action was started over 3½ years after the execution of the Deed.  Chan could not understand that document.  There is a ring of truth to the explanation.  I do not therefore take this episode as an adverse reflection of Chan’s credibility.

36.  Secondly, Chan was taxed in cross-examination on the various positions and offices which she was holding for the purpose of showing that she was and is in fact quite a sophisticated person.  In particular, Mr Liu has deployed a good deal of firepower on Chan’s fellowship with The Professional Validation Council of Hong Kong Industries.  I have no reason to doubt Chan’s evidence, despite its inconsistency with the website information obtained by the plaintiff, that she was not required to undergo any vigorous training before obtaining the fellowship. 

37.  In respect Chan’s chairmanship of the Mainland Affairs Committee of the Hong Kong Jewellery Manufacturer’s Association, I believe that she was downplaying her role or importance.  Further, she evidence is that she was able to pass onto her son her membership of the Chinese People’s Political Consultative Conference of China Committee of Jinan.  Such evidence suggests that Chan is a person of influence.

38.  However, it is unnecessary to rely upon those evidence (it is not uncommon for some people to have a desire to accumulate various titles to enhance their social status) to come the view that Chan is certainly not an ignorant lady.  She was the Vice Chairman of HFG for many years.  Although she denied that she was involved in the running of HFG, Chan accepted that she was responsible for the development of the Mainland market.  Clearly, she may not be well-educated but the years of struggle in the business world must have provided good training for her.  I have no doubt that the development of the jewellery business by Lam had a lot to do with Chan’s contribution over the years.

39.  Thirdly, Chan was taken to a lot of material concerning, inter alia, a company which only came into existence in August 2010 – Elody International Co Ltd.  That company owns another company in Shenzhen called Elody Jewellery (Shenzhen) Co Ltd.  Chan was adamant that Elody is owned by a friend and that she is only a consultant employed by that company.  I find this part of Chan’s evidence quite unconvincing.  I have little doubt that she was trying her best to cover her assets.  In particular, there is evidence that in October 2010 a property worth over HK$8 million was acquired in the name of Chan’s son.  I reject the suggestion that the property was paid for by a generous friend because Chan was living in a rented property at the time.

40.  The second and third matters stated above certainly damage Chan’s credibility.  On the other hand, a balanced view must be taken by the court on the totality of the evidence.  Plainly, Chan is alive to the fact that the plaintiff will seek to show that she is a sophisticated woman.  Under an adversarial system, it is not surprising for a witness to adopt a protective stance in such circumstances.  Similarly, it is unsurprising that Chan does not want to reveal her assets in public given her financial circumstances. 

41.  The real issue is whether Chan executed the Deed under the undue influence of her late husband.  To that I now turn.

Undue influence

42.  First and foremost, Chan was unable to read the Deed.  There is no evidence that there was any explanation provided to her as to what she was signing.  Indeed, Chan’s evidence is that there was no such explanation.  This clearly undermines the proposition that Chan had consented to the obligations set out in that document. 

43.  Why would she sign a document which she did not understand?  Here, the fact that Chan was not an ignorant person works against the plaintiff’s case.  Chan’s willingness to sign a document which she could not understand is consistent with her evidence that she was a submissive wife who yielded to the demand of her volatile husband.

44.  On the totality of the evidence, I have no difficulty finding that Chan had at all material times reposed trust and confidence in Lam.  They were not merely husband and wife but also partners in their business venture.  Plainly, the Deed is a transaction which calls for an explanation – a wife standing as surety for the margin trading by her husband’s company. 

45.  I have not overlooked the fact that there is some medical evidence to corroborate Chan’s claim that Lam had used force on her.  It is unnecessary to make a specific finding on the point.  I have reminded myself that Chan’s evidence on her relationship with her late husband is not something which an outsider is in a position to contradict.  I have therefore paid special attention to Chan’s demeanour as a witness.  I have considered carefully if there is any indicium in the evidence that Chan was not telling the truth.  There is simply no reason for the court to doubt this part of Chan’s evidence, despite my observation that she has been less than candid on the matters identified above.

46.  Mr Liu tried his best to turn the table by pointing out that Chan was a willing guarantor of D1’s debts.  Relying on the evidence of Ho, Mr Liu submitted that prior to the execution of the Deed there had been no less than 7 occasions where a deed of guarantee was willingly signed by Chan after she was properly informed.  However, that does not answer the problem that on the occasion when the Deed was executed Chan did not understand the document and she signed it under the instruction of Lam. 

47.  Further, when that very point was explored with Chan in evidence, she gave another spontaneous reply by saying that she did willingly provide guarantees for the purchase of properties but she would not have agreed to stand as guarantor for shares speculation.  She said that she did not at that time even know what margin trading was about.  There is again a ring of truth to the evidence.  It is consistent with the fact that the loans involved in the 7 previous transactions identified by Mr Liu were, more likely than not, all needed for general working capital. 

48.  In the premises, I am driven to the conclusion that the Deed was executed by Chan under the undue influence of Lam.

49.  Mr Liu has, quite rightly, accepted that this is a pure surety case.  As a consequence, the plaintiff was put on inquiry in respect of the transaction in question.  It has no case in this regard.  The evidence is that Leung’s colleague by the name of Francis Lee simply left the unexecuted Deed to Ng for Chan’s signature.  There was never any contact made between any of the plaintiff’s staff and Chan until after the death of Lam. 

50.  Accordingly, this action must be dismissed. 

51.  For completeness, I shall state briefly my decisions on the ancillary arguments, for which purpose I have scrutinised the various contractual provisions relied upon by the plaintiff.  They have been helpfully identified in a document prepared by Mr Liu marked “A”.

52.  I am satisfied that the Statement contains no detectable error and that the plaintiff is entitled to reply upon it as prima facie conclusive evidence.  There is in fact no evidence to contradict the same.

53.  I see no substance in the unparticularised allegation that the interest charged by the plaintiff is unconscionable.  In any case, Mr Liu has rightly pointed out that, as explained in “B”, the default interest of 30% per annum was only applied for a short period of time from 29 September to 13 October 2008.  Thereafter, interest is payable pursuant to a summary judgment entered against, inter alia, D1 dated 25 May 2009.  By virtue of that judgment, the default rate was applied up to the date of judgment and the judgment rate is applicable thereafter. 

54.  I am satisfied that there is no inordinate delay in the prosecution of this action such as to justify a reduction on the interest entitlement.

55.  I disagree with the failure to mitigate loss argument.  There was only a small window (morning of the 30 September 2008) whereby the plaintiff could have disposed of the Securities in the market. During that morning, the decision-maker (Chairman of the plaintiff) could not be contacted because he was on a flight.  Further, there is no evidence to suggest that the purchaser of the Securities was in any way connected with the plaintiff. 

56.  I am also satisfied that had it succeeded in this action the plaintiff would be entitled to an order for costs on indemnity basis pursuant to its contractual rights.

Conclusions 

57.  This action is dismissed with costs to Chan to be taxed if not agreed.

58.  Last but not least, I am grateful to Mr Liu for his assistance to the court.